Finding the Hidden Opportunities

January 2012

By Dr. Paul Monticciolo, SIGNAL Magazine

Defense acquisition reform could have an upside for prime contractors.

It is undeniable that defense acquisition reform has ushered in a new reality for prime contractors. Firm-fixed-price contract awards, shorter time lines, open-system architectures, the demand for greater value—these are just a few of the game-changing challenges now facing primes. In addition, subcontractors contribute often as much as 80 percent of a program’s content, so primes are placing increased pressure on subs to reduce margins and pass on supply-chain savings.

However, these challenges also can create opportunities for the well-positioned defense contractor. To gain that competitive advantage, primes need to rethink their business models and partnering strategies.

A number of factors are influencing defense acquisition reform. Most prevalent are the critical need to adapt quickly to meet ever-changing, new threats and the requirement to do so with shrinking budgets.

Today’s threats to military and civilians are incredibly vexing, as the traditional battleground morphs to a field of asymmetric warfare, violent conflict between a formal military and an informal, poorly equipped, but elusive opponent. Trying to locate isolated explosives within densely populated cities or identify small groups of insurgents hidden in a mountainous wilderness is like looking for a specific needle in a stack of needles.

Radar systems, whether they are airborne, ground-based or ship-based solutions, now must track faster, smaller targets. Ship-based radar, which originally was designed for traditional warfare, now has to detect slow, ground-moving targets such as people or vehicles.

Delivering sensor-based information to the people who need it is another part of the challenge, and command, control, communications, computers and intelligence (C4I) systems are being pressed to implement ever-greater levels of battlefield connectivity. Across the whole range of systems, the time to information is critical.

To provide today’s defense forces with the support they need requires sophisticated, integrated solutions that merge a range of technology components into optimized, application-specific solutions that leverage the latest technologies and can be updated quickly.

These factors mandate shorter time lines, stricter budget management and greater value. As a result, the U.S. Defense Department is making sweeping changes to the way it works with primes to acquire technology, products and services. In essence, primes currently are required to do more with less. Deputy Defense Secretary Ashton Carter’s “Memorandum for Acquisition Professionals,” issued in September 2010, outlined 23 areas for acquisition reform designed to “deliver better value to the taxpayer and warfighter” by improving the way the department does business. Below are three areas from this memorandum that represent hidden opportunities both for primes and their partners.

First, the focus on budget containment and reduction has resulted in the move from cost-plus to fixed-price types of contracts, shifting a major portion of both the technical and business risks from the government to primes. The typical new contract has a cost ceiling of 120 percent and places a limit on the government’s liability for overrun of the contract target cost. Managing to meet shorter timelines becomes critical in this scenario, because missed deadlines translate to program cost overruns that now must be absorbed by primes, thus eating away at potential profits.

Second, the use of open-system architectures addresses both the vital need to deploy new technology faster and the pressing demand to work within shrinking budgets. As a corollary, it paves the way to meeting the department’s goal of increasing the role of small business in the defense marketplace. Proprietary technologies, while providing competitive advantages for primes, typically are more expensive to develop, limit upgrade paths and make system integration difficult. Open, standards-based systems deliver equally high performance, open the door to increased functionality and scalability, enable the use of best-of-breed technology subsystems, and ensure straightforward plug-and-play capabilities.

As the Defense Department seeks to reduce the number of new, major programs and focus on more frequent technology refreshes, open-systems architectures will drive increased integration with fewer stand-alone systems. This scenario invites greater competition for technology refresh and upgrade contracts from a broader pool of companies.

Finally, reducing development time is a necessary response to the need to deliver advanced technology and warfighting capabilities that address never-before-seen threats, and to the ability to adapt quickly to these threats as they evolve and new ones emerge. Primes must be able to deliver greater, more advanced capabilities, faster. Instead of multiyear development cycles, primes must meet 12- to 18-month upgrade spirals. The emphasis on faster development, along with the move to open standards, increases competition from smaller, more nimble businesses on each program and at each stage of the life cycle. The incumbent no longer is guaranteed a strong position at any step in the re-bid process.

These reforms, while creating both business and technical risks, also represent an opportunity for primes to gain a competitive advantage. By leveraging partners, using commercially available, standards-based technology and embracing concurrent engineering, primes will be well-equipped to meet the demands of acquisition reform, deliver the technology solutions warfighters need and stay competitive.

To capture the hidden opportunities in this new acquisition reform environment, primes first must rethink their partnering strategies. Instead of managing scores of vendors, they should set clear criteria for partner selection and focus only on those who can deliver business value—not just components. When evaluating partners, primes must seek out those with experience in working with commercial technologies, standards and open architectures. Primes should expect their partners to bring expertise in systems engineering and design; optimization for size, weight and power (SWaP); thermal management techniques; and validation and qualification services—all at the subsystem level. In addition, partners should demonstrate experience in providing subsystems on a fixed-price basis. This will enable primes to require firm, fixed pricing on their partners’ deliverables, moving the risk to the responsible parties.

To fully leverage a trusted partner relationship, primes should engage with partners early, while the strategy to win a program is being developed, and then leverage their expertise to provide complete subsystems, not simply components to the overall solution. Many subs design, build and deliver thousands of subsystems annually using proven technology and quick reaction capabilities that speed time to market. These capabilities—along with specific domain expertise that primes may not have in-house—enable primes to embrace a concurrent engineering strategy that can jump-start design efforts and help meet challenging 12-month programs.

In a concurrent engineering environment, the application development is uncoupled from the hardware implementation. In this situation, the prime takes responsibility for the overall application and engages partners to deliver subsystems that can be plugged into the application upon delivery. By doing so, primes can leverage the expertise of partners in their niche technologies. For this to work successfully, a prime’s partners need to be able to deliver complete subsystems that include middleware, allowing the prime-developed application software to be independent of any specific hardware implementation. The greatest value in this approach is gained when the engineering teams get on the same page early and work in parallel, thus shortening the design time line.

This approach offers primes a number of benefits. For example, they can reduce technical, programmatic and business risks; increase their probability of win (P-Win) on must-win programs and upgrades; and maintain or improve margins under firm fixed contract awards. In addition, they can compress development and deployment cycles, distinguish themselves from the competition and turn fixed operating costs to variable expenses.

Historically, embedded real-time subsystems have been optimized for performance and SWaP—those were the highest priority. Simultaneously, there has always been a parallel world of commercial systems built on open standards, with flexible solutions, software portability and lower costs. These systems could not deliver the low-latency performance demanded by embedded defense systems nor satisfy their SWaP requirements. Now, however, as the Defense Department demands the use of standards-based technology, an open-systems solution has become a de facto requirement for primes in order to bid on most programs.

When it comes to technology refreshes, the use of commercial technologies provides gains in areas such as processor speeds, interface advances and storage capacity. In addition, having the hardware implementation uncoupled from the application software significantly lowers costs and timelines. As a result, primes can deliver new and upgraded capabilities at much lower costs.

There are some drawbacks to using commercial components, including potential maintenance and end-of-life issues. Partners who employ good systems engineering practices, however, will provide support long after the subsystem is delivered. A good partner will monitor component issues, address maintenance as needed and provide migration paths over the subsystem life cycle.

The Defense Department’s focus on acquisition reform raises many difficulties for the old way of doing business. But it also presents an opportunity for those primes who can, in Deputy Secretary Carter’s words, “do more, faster, with less.” By adapting and partnering with companies that share risks and add business value, primes can increase their P-Win and profit in this new environment.

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